1. Principles of Macroeconomics Spring 2010 Day 8 Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” 卜安吉

2. April 27, 2009Principles of Macroeconomics, Day 82 Chapter 30: Money, Banking, and the Fed Know the functions: Know the functions: –Store of Value, Unit of account and medium of exchange Fiat Money versus Commodity Money Fiat Money versus Commodity Money M1 is made up of what three components? M1 is made up of what three components? –Currency in Circulation, Demand Deposits and travelers checks

3. April 27, 2009Principles of Macroeconomics, Day 83 The Fed What are the three components of the Fed organization? What are the three components of the Fed organization? –The Governors –The Federal Reserve Banks –The Federal Open Market Committee “The Fed” is the Central Bank (CB) of the U.S.A.

4. April 27, 2009Principles of Macroeconomics, Day 84 Three Tools of the Fed (CB) 1.Open Market Operations 2.Discount Rate 3.Reserve Requirement Bernanke, Chair Kohn, Vice Chair Warsh Duke Currently there are 5 Federal Reserve Board Governors: Tarullo http://www.federalreserve.gov/aboutthefed/default.htm

5. April 27, 2009Principles of Macroeconomics, Day 85 1. Open Market Operations Federal Open Market Committee (FOMC) Federal Open Market Committee (FOMC) –The 7 Board of Governors –New York Fed Bank President –4 other Presidents of the 11 other Fed Banks Buy and Sell U.S. Treasury Bills (Notes and Bonds too but mostly Bills) which increases/decreases the interest rate (respectively). – called open market operations Buy and Sell U.S. Treasury Bills (Notes and Bonds too but mostly Bills) which increases/decreases the interest rate (respectively). – called open market operations

6. April 27, 2009Principles of Macroeconomics, Day 86 2. Required Reserve Ratio Set by the Governors - the Reserve Ratio is the percentage of checkable deposits that must be kept at the Federal Reserve District Bank in their District as cash. The effect is that the cash is not available for banks to loan out.

7. April 27, 2009Principles of Macroeconomics, Day 87 3. Discount Window The Discount Window is not a physical place but means that commercial banks may borrow from the Fed at the Discount Rate. The Discount Window is not a physical place but means that commercial banks may borrow from the Fed at the Discount Rate.

8. April 27, 2009Principles of Macroeconomics, Day 88 3. Discount Window The “lender of last resort” function. The “lender of last resort” function. The original legislation in 1913 created the Fed in 1914 with only lending to banks as the bank’s role. The original legislation in 1913 created the Fed in 1914 with only lending to banks as the bank’s role.

9. April 27, 2009Principles of Macroeconomics, Day 89 The Federal Reserve System The Board of Governors The Board of Governors The Fed Banks The Fed Banks The Federal Open Market Committee (FOMC) The Federal Open Market Committee (FOMC)

10. April 27, 2009Principles of Macroeconomics, Day 810 The Fed: The Board of Governors

11. April 27, 2009Principles of Macroeconomics, Day 811 The Fed: The Fed Banks The Twelve Federal Reserve Districts – The Fed Banks

12. April 27, 2009Principles of Macroeconomics, Day 812 The Fed: The FOMC   The FOMC:   The Seven Governors, New York Fed President and 4 other Fed Presidents – 12 total members   Set Monetary Policy for the United States   In other words, the FOMC sets the “Federal Funds Rate” – The interest rate that banks borrow funds from each other   The “Fed Funds” rate determines the “Prime” rate or the interest rate that banks charge their “best” corporate customers   An Increase in the fed funds rate means borrowing is more “expensive.”   A decrease?

13. April 27, 2009Principles of Macroeconomics, Day 813 The Fed: The FOMC 2009 Committee Members 2009 Committee Members –Ben S. Bernanke, Board of Governors, Chairman Ben S. BernankeBen S. Bernanke –William C. Dudley, New York, Vice Chairman William C. DudleyWilliam C. Dudley –Elizabeth A. Duke, Board of Governors Elizabeth A. DukeElizabeth A. Duke –Charles L. Evans, Chicago Charles L. EvansCharles L. Evans –Donald L. Kohn, Board of Governors Donald L. KohnDonald L. Kohn –Jeffrey M. Lacker, Richmond Jeffrey M. LackerJeffrey M. Lacker –Dennis P. Lockhart, Atlanta Dennis P. LockhartDennis P. Lockhart –Daniel K. Tarullo, Board of Governors –Daniel K. Tarullo, Board of Governors Daniel K. TarulloDaniel K. Tarullo –Kevin M. Warsh, Board of Governors Kevin M. WarshKevin M. Warsh –Janet L. Yellen, San Francisco –Janet L. Yellen, San Francisco Janet L. YellenJanet L. Yellen Alternate Members Alternate Members –James B. Bullard, St. Louis James B. BullardJames B. Bullard –Thomas M. Hoenig, Kansas City Thomas M. HoenigThomas M. Hoenig –Sandra Pianalto, Cleveland Sandra PianaltoSandra Pianalto –Eric S. Rosengren, Boston Eric S. RosengrenEric S. Rosengren –Christine M. Cumming, First Vice President, New York Christine M. CummingChristine M. Cumming Next Meeting: Dec. 15-16, 2009 still 0 - 0.25% ff rate?

14. April 27, 2009Principles of Macroeconomics, Day 814 The Fed: The Chairman Ben Bernanke Where is it today?

15. April 27, 2009Principles of Macroeconomics, Day 815 Money Creation Know how banks create money through demand deposits (checking accounts) and how the money multiplier works. See Homework